NEW YORK, Oct 18 (Reuters) - The euro fell against thedollar on Thursday as uncertainty surrounding the U.S. jobmarket overshadowed favorable demand at a Spanish bond sale.

The single European currency rose to a 5-month high againstthe yen after Spain sold more debt than it planned and itsfunding costs fell, causing its bond yields tofall as views on the country, which hung on to itsinvestment-grade credit rating earlier this week, improved.

But as the U.S. session opened, data showed the number ofAmericans filing new claims for unemployment benefits rose lastweek, reversing a sharp decline in the prior week but stillpointing to a labor market that is slowly healing.

"Jobless claims reverted to trend at 388,000, last week'slarge drop was statistical," said Joseph Trevisani, chief marketstrategist at Worldwide Markets, Woodcliff Lake in New Jersey."Improvement in the labor market will continue to be fitful andslow."

The euro rose to 104.07 yen, its strongest sinceearly May and remained close to that peak, last trading at103.92 yen, up 0.3 percent.

Against the dollar, the euro fell 0.1 percent on the day to $1.3103, though within striking distance of Wednesday'sone-month peak of $1.3139. Traders reported large optionexpiries at $1.3100 which may influence trade, keeping the euroclose to that level.

BAILOUT REQUEST

"The easing of Spanish yields should provide a double boostto the Iberian economy as it decreases funding costs while atsame time allowing the government to make smaller cuts in fiscalspending," said Boris Schlossberg, managing director of foreignexchange strategy at BK Asset Management in New York.

Some US$3.607 billion in euros changed hands using ReutersDealing on Thursday.

Still, investors continue to anticipate that Spain willrequest a bailout in the coming weeks, prompting the EuropeanCentral Bank to step in and buy its bonds, which would also liftthe euro.

At the same time, euro bids from sovereign investors werereported at $1.3080 and expected to limit any falls in thecurrency.

"We are expecting some more upside in the euro as investorsseem to get comfortable with the timeline about when Spain willseek a bailout and the ECB's bond buying will be triggered," Beat Siegenthaler, currency strategist at UBS.

"At the same time the global picture is also improving giventhe Chinese and the U.S. data."

A raft of data from China was either in line with or betterthan expectations, helping the euro and riskier assets. Growthin the third quarter was 7.4 percent from a year earlier, inline with a Reuters poll.

And Wednesday's strong U.S. housing numbers continued tohelp the dollar against the yen with the U.S. currency climbingto a two-month high against the yen of 79.36 yen.

The Japanese currency has also been under pressure onexpectations the Bank of Japan will announce fresh stimulus.

The higher-yielding Australian dollar hit athree-week high of $1.0412.